“As part of the crowdfunding regulation, we are observing, among other things, the use of a new start-up financing instrument – called `SAFE` – in offers aimed at a large investor base, usually small. A SAFE, which means a “simple future equity agreement,” is an agreement between an investor and a company in which the company typically promises to give the investor a future stake in the company if certain triggering events occur. (Caution: The arguments and positions in this article apply to the standard Y Combinator SAFE instrument. In some situations, some investors have successfully negotiated a mandatory redemption or redemption of their “SAFE” contracts. These agreements are not SAFE. They are “SAFE” only in name. In fact, these amended contracts are convertible debt contracts.) Technically, SAFE contracts do not explicitly limit the number of shares to be issued. But, of course, the number of shares to be issued is effectively limited by the SAFE agreement. The conversion price when SAFERs are converted into stocks is calculated as the lowest: there are currently several options for startups looking to structure investments. One of the most traditional and well-known ways to obtain seed financing is through the use of convertible bonds. Another option that is becoming more and more common in the market is SAFE (simple agreement for future stocks). Another start-up financing option, which is becoming more and more common in the market, is SAFE.
Developed by Y Combinator in 2013, the SAFE is an unsecured financial instrument that allows investors to buy shares in a future price round, but has no interest rates or maturity dates. SAFE may also include conditions similar to convertible bonds, such as valuation caps and discounts, but these are not mandatory and will likely be part of the negotiation process between the investor and the company. The form of this security offers a simpler alternative to the convertible bond (the entire agreement is usually only five pages long), but the substance behind it can be extremely complex from a financial reporting perspective. SAFE does not have the traditional characteristics of the legal form “debt” as interest rates and maturity dates are absent, but this does not necessarily mean that outstanding SAFERs should be classified as a default equity instrument, especially since there are often provisions in the agreement that allow the holder of a SAFE to require cash repayment in certain circumstances. Holders of these instruments may then consider the treatment of liability (a nuanced but reasonable difference from debt) as an option. This means that the company will be required to carry the safe as a debt on the balance sheet (think of it as a bond rather than a debt) and regularly evaluate the SAFE to write the value up or down and record a result based on the fluctuation in value. How do you rate SAFE? Well, it`s a completely different blog and a completely different thing. The simple answer is a wild assumption by management based on the best information it has, or the need to hire an evaluation specialist (preferred, but more expensive method).
If you actively sell the SAFE, the fair value is generally known, it will be the same value for which you sell it. If the time elapses between the SAFE offer and the reporting period, especially if additional bids have taken place, the SAFE probably has a different value and you should hire an evaluation specialist to help you. It is an agreement between an investor and a company to invest in a company without setting maturity dates or declared interest rates. A SAFE can be considered a warrant, but not exactly – warrants are options to buy a certain number of shares at a predetermined price – whereas with SAFE, the price is not set in stone at the time of the conclusion of the contract. SAFE was developed by Y-Combinator to reduce some of the burden on founders and investors associated with convertible bonds (interest and legal implications of debt). As explained and described in the previous sections, SAFEIs are contractual arrangements between the Company and the Investors under which investors are granted the right to receive shares (i.e. preferred shares) in the future if certain triggering events occur. SAFERs are therefore contractual derivatives of a company`s own funds. Accordingly, SAFERs should be classified as equity instruments. I had clients who wanted to classify SAFERs as long-term debt and others as equity. Through lawsuits and procrastination, scrutiny from regulators and my colleagues, I can finally claim that I am the civil servant. informal accounting guidelines that I believe will apply to the most common SAFE agreements.
This accounting treatment was reviewed and approved by the SEC on the basis of actual facts and circumstances. As a disclaimer, as all SAFES are different, this guide may not apply to all SAFE. From an accounting point of view, care must be taken to ensure that none of the deposits are incorrectly recorded as turnover – surprisingly, this is more common than you might think. As accountants, we make many year-end adjustments to ensure that the movement of money from one location to another is properly recorded for financial statement disclosure and tax disclosure. It is also important to ensure that actual bank deposits are accompanied by convertible bond agreements, as bank/transfer fees can also lead to discrepancies. For those who do not know, a SAFE is an agreement by which an investor makes an investment in a company that is converted into preferred capital when AND IF preferred capital is issued through a qualified capital increase. It is not repayable like debt, it does not bear interest like debt, and the risks and opportunities are more suited to an equity investor. It is possible that the company will never proceed with a preferential round because they are very successful and, therefore, SAFERs never need to be converted and investors will never be reimbursed unless there is a change of control. This is really a risky bet on the part of an investor, especially a retail investor. “While these securities have been used in some regulatory crowdfunding offerings, they are not securities that many retail investors are familiar with.
An investor will only receive a stake in a SAFE company if the specific conditions of the security are met. If the conditions are not met, the investor has no choice. As an additional element of risk, the conditions that determine whether and when an investor can receive the future shares vary from offer to offer. In short, despite its name, a so-called SAFE is neither “easy” nor “safe”. To educate investors about the potential risks associated with SAFE offerings, our Office of Education and Investor Advocacy is releasing an investor bulletin on these particular types of instruments this week. This condition is clearly met. .